Fossil Fuel Subsidy Reform Research Suggests Emission Reductions Equivalent to at Least a Quarter of the Commitments Countries Made at Paris

Research released in a letter to Nature describes how a single policy instrument, fossil fuel subsidy reform (FFSR), could deliver carbon emission reductions of between 0.5 to 2 Gt, or between 1 and 4 per cent, globally by 2030. The researchers point out that this is less (around a quarter) of the combined effort currently proposed by countries as part of the Paris Agreement of between 4-8 Gt from fossil fuels and industry. The research is novel in that it models the reform of both consumer and producer subsidies, based on available datasets.

The researchers have been methodical in using available datasets; however, these datasets have significant exclusions, notably missing many of the large-scale subsidies to coal and gas power generation and containing incomplete or missing data on subsidies to fossil fuel production in much of the world. Better datasets are urgently needed to show the full scale of fossil fuel subsidies and to support informed debate nationally and globally.

The findings are significant given that only around 15 countries (out of a total of 196) included the policy tool of FFSR within their Nationally Determined Contributions (NDCs) in the lead up to the Paris Agreement on climate change in 2015. To help deliver deeper, faster emissions cuts and increase ambition to stay within a temperature increase of well below 2 degrees, many more countries could now consider incorporating this policy instrument. For effective carbon emission reductions, FFSR can work alongside a suite of other strategies, such as renewable and energy efficiency goals, coal phase out, carbon taxes and emissions trading schemes.

Policy-makers, including groups such as the Friends of Fossil Fuel Subsidy Reform, have long understood the value of promoting reforms alongside targeted mitigation measures to the poor. FFSR is one of the very few policy instruments that saves governments money by reducing government spending on fossil fuels and passing this cost gradually through to consumers via a market price. Such reforms have also been linked to a shift in the delivery of state welfare from cheap fossil fuels to more sophisticated and targeted methods, such as the development of social safety nets and cash transfers. The carbon emission reductions from such a policy instrument are measured as a co-benefit (as this research and others have done), but are rarely the main reason behind reforms. Indonesia and India each saved around USD 15 billion from reforms in 2015; Indonesia reinvested these savings into regional and village priorities, poverty reduction and infrastructure programs. The paper in Nature notes that, without reform, fossil fuel subsidies would reach between USD 550 billion and 970 billion in 2030, or 1 per cent of world GDP. This is a huge lost opportunity for governments.

Other research has found that FFSR leads to an average savings of USD 93 per tonne of carbon abated across 20 countries reviewed. Compared to the abatement cost of other instruments, this is significant. A focus on the phase-out of government subsidies to producers alone found a global reduction of 37 Gt of carbon dioxide by 2050 (equivalent to the global emissions from the aviation sector over the same period).

In order to maintain emission reductions from FFSR in the long term, there must also be an overall transition away from fossil fuels and toward renewable energy that is either regulated by a strong climate agreement or delivered at the country level. One approach to supporting this is to redirect some of the funds saved from fossil fuel subsidies towards renewables and energy efficiency directly. This combination of reforms plus a SWAP and reinvestment of 30 per cent of the savings into renewables and energy efficiency could double potential emission reductions for the long term.

The research strongly adds to the evidence base that government policy-makers and intergovernmental agencies, such as the Intergovernmental Panel on Climate Change, should include this economic policy instrument in the arsenal of tools available when it comes to fighting climate change. Another aspect that could well merit further investigation is increased taxation of fossil fuels, to account for their negative externalities and to support government investment in a sustainable future. Some estimate that a combined reform of both fossil fuel subsidies and energy taxes could lead to carbon emission reductions of between 18.1 and 22.9 per cent, as well as provide much-needed ongoing revenue streams to governments. Fiscal policy reform looks like a win-win to many.